Tuesday, December 14, 2010

This One Is Way Overdue For A Major Upside Rerating

I have always liked TSH Resources. This one is the beneficiary of an increasing number of research houses covering the stock over the last couple of months. What is more significant is that the company has reinvented and re-engineered its business model so much so that it is a steady cash generating machinery.

TSH has transformed from a largely downstream processor into a formidable upstream player via its aggressive expansion into Indonesia over the years and now has almost 100,000 hectares in oil palm landbank. Only 27% of it has been developed. Despite this significant development, valuations are at still at historical average, which implies that the transformation has yet to be fully appreciated by the market.

The group has a planted area of approximately 27,000 hectares, ofwhich over half is immature. If we include the young palms, the group has 70% of its planted area below prime. As the areas coming into maturity are quite substantial, the projected FFB production growth should be 20-25% per annum over the next few years.TSH remains one of the highest growing planters in Malaysia and Indonesia, given its aggressive investments in recentyears (54% of its planted area is still immature).

The stock stirred some interest last month following their excellent results and has attempted to retests its high yesterday. Looks very likely to trying to find its proper valuation, which I see should be at RM3.60-3.80 at the bare minimum. This is a stock you can buy for 1 month, 3 month or 1 year as I see it topping RM4.00 within 6-12 months. TSH’s earnings at the cusp of a significant rebound, not only due to high CPO prices but also from phenomenal FFB production growth in the coming years.

On revised estimates, a couple of research houses have forecast earnings to grow at a 31% CAGR over the next two years, driven largely by the oil palm division.

Wood - This may explain some investors perception of TSH as a wood products player. However despite the difficult market conditions for wood products, this division will still be in the black. What many are overlooking is their foray into palm oil. After recording losses in 1HFY10, the wood products division finally broke even in 3QFY10. However, the division was still in the red in 9MFY10 with a small loss of RM2mil. Going forward, if the division continues to be in the black in 4QFY10, the division could break even for the full year. Earnings of the wood products operations are not exciting due to weak demand from the European countries like France, Spain, Germany and Portugal. Apart from Europe, the wood products division also sells its hardwood floor products to China and the US. TSH’s wood products operations are carried out by 65%-owned Ekowood International Bhd.

Wilmar - TSH has a good link up to Wilmar. In the cocoa processing, business were affected by unfavorable commodity price movements, but is about to turn the corner. The group expanded aggressively into Indonesia since 2006, and currently has almost 100,000 hectares in oil palm landbank. Only 27% of it has been developed. It has also expanded downstream via 50:50 JV with Wilmar and now operates a 750,000 tonnes per annum (tpa) palm oil refinery in Kunak, Sabah.

Suffice to say, it seems TSH is broadening its business to "look like a vehicle" that will be highly attractive to Wilmar down the road. Wilmar's willingness to be in a jv with TSH may be a strong indication of future developments down the track - to me, this is the main basis for the major rerating.

The "Killer App" - What could very well entice Wilmar to gobble up TSH eventually is the discovery of a new palm oil clone by its research lab. A new oil palm clone dubbed Wakuba oil palm ramet brand was launched with a promise of doubling the current oil yield. Named after TSH Biotech Sdn Bhd's five-year-old tissue-culture laboratory in Wakuba Gading, Tawau, Sabah, the new clone promises an oil yield of up to 10 tonnes per ha compared with the average current yield of about 4.5 tonnes per ha in the country. TSH Resources' chairman Datuk Kelvin Tan said the company had invested RM25mil in the laboratory, which is expected to produce 1.5 million ramets by 2015 compared with 500,000 this year.

Plantation Industries and Commodities Minister Tan Sri Bernard Dompok launched the product in conjunction with the 2010 National Seminar on Palm Oil Milling, Refining, Environment and Quality here yesterday. Dompok also witnessed the signing of a memorandum of agreement (MOA) between the Malaysian Palm Oil Board (MPOB) and TSH Resources. The new MOA extends the technical collaboration on genetic marking to further improve efficiency and quality of ramets produced at the laboratory.

For 2010, the company is on track to record just over RM1bn in revenue and should reach RM70m in net profit. That equates to a net EPS of about 20 sen. The key driver to the rerating which some houses have missed is the kicker from palm oil in the years ahead, TSH should be able to make a net profit of RM170m in 2011 or a net EPS of 27 sen. The surge should continue into 2012 and 2013 judging from the planted area and the massive area still to be planted. In 2012, conservatively net profit should scale to RM200m or a net EPS of 31 sen.

The shares issued is 413.7m and you will find very few sellers on the way up as the owners know very well that the break up value of TSH is between RM4.20-4.60.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

5 comments:

I have a fren who worked inside that comment some bad management, some directors trading the company's shares to earn money. They are big players of this shares. Although the company is making money and I have monitored the shares quite a while, but I decided not to buy the shares in the end as I do not want to take risk some small cap where director sell and buy to make money in share market. Sadly, it seems not a good decision now

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Its Salvatore cos' Salvador was taken already. This blog hopefully embodies Dali's spirit: intelligence, creativity, deep dreams, symbolism, whimsicality, enrichment of lives (p/s only Asian girls are featured on the left column)